Bank of England launches biggest rate hike in 27 years, predicts prolonged stagnation

Bank of England launches biggest rate hike in 27 years, predicts prolonged stagnation

BoE Governor Andrew Bailey warned that the bank is on a “narrow path” between growth and inflation.

Bloomberg | Bloomberg | Getty Images

LONDON – The Bank of England on Thursday raised interest rates by 50 basis points, the largest single increase since 1995, and predicted the UK’s longest recession since the global financial crisis.

The sixth straight increase raises borrowing costs to 1.75% and represents the first half-point increase since the bank became independent from the British government in 1997.

The Monetary Policy Committee voted 8-1 in favor of the historic half-point rise, citing rising inflationary pressures in the UK and the rest of Europe since its previous meeting in May.

“This largely reflects the doubling of wholesale gas prices since May, due to Russian restrictions on gas supplies to Europe and the risk of further restrictions,” the MPC said in its accompanying statement.

“As this feeds into retail energy prices, it will exacerbate the decline in UK household real incomes and increase UK CPI inflation in the near term.”

British energy regulator Ofgem raised the ceiling on energy prices by 54% from April to absorb higher global costs, but are expected to rise further in October, with annual household energy bills expected to exceed £3,600 ($4,396).

The bank now expects headline inflation to peak at 13.3% in October and remain at elevated levels for most of 2023, before declining to its 2% target in 2025.

“At the same time, the bank is forecasting a prolonged recession starting later this year and even a higher peak of inflation. This is a bad economic mix, which the central bank will be hard to navigate at the best of times, let alone when it is getting dragged into the political spotlight.”

Luke Bartholomew

Senior Economist, Abderran

Markets broadly priced it in a more aggressive approach at the August meeting, after UK inflation hit a 40-year high of 9.4% in June, as food and energy prices continued to rise, deepening the cost of living crisis. historical in the country.

BoE Governor Andrew Bailey vowed last month that there would be “no if or no” in the central bank’s commitment to bring inflation back toward its 2% target.

Analysts have been keen to assess the bank’s language, particularly its past commitment to act “aggressively” on inflation, and the Monetary Policy Committee retained that language in Thursday’s report.

The bank also said it plans to start active government bond sales worth around 10 billion pounds ($12.1 billion) each quarter from September, subject to the final green light from policy makers.

The next recession

The bank released a bleak outlook for economic growth, noting that the recent rise in gas prices had led to another “significant deterioration” in the outlook for activity in the UK and the rest of Europe.

The MPC now predicts that the UK will enter recession from the fourth quarter of 2022, and that the recession will last five quarters as real after-tax household income declines sharply in 2022 and 2023 and consumption begins to contract.

“Growth thereafter is very weak by historical standards. The contraction in production and the weak growth outlook beyond that effectively reflects the significant negative impact of sharp increases in global energy and tradable prices on the real income of UK households,” the MPC said in its monetary report. Policy Report.

Forecasts warn of a peak-to-trough production decline of 2.1%, with the economy starting to contract in the fourth quarter of 2022 and contracting throughout 2023.

Luke Bartholomew, chief economist at Abrdn, said the bank’s forecast shows how tough the economic picture for the UK is compared to other major countries.

“At the same time, the bank is forecasting a long recession starting later this year and even higher peak inflation. This is a bad economic mix, which the central bank will be hard to navigate at the best of times, let alone when they are increasingly drawn into the political spotlight.”

Liz Truss, the contender to win the Conservative leadership contest and succeed Boris Johnson as prime minister, is said to be considering a review of the Bank of England’s inflation mandate and its independence from the central government.

“With inflation now expected to continue for much longer, it is hard to see how the bank can shift toward supporting the economy anytime soon. As such, investors should expect further rate increases from here even as markets and the economy struggle,” Bartholomew added.

Sterling fell more than 0.4% against the dollar after the bank’s announcement, trading around $1,209, while the FTSE 100 rose 0.4%.

#Bank #England #launches #biggest #rate #hike #years #predicts #prolonged #stagnation

Leave a Comment

Your email address will not be published.